A cryptocurrency developer who received two citations while entering a hotel last month will not comply with the demands and is instead suing the federal regulator that issued them.
Do Kwon, a citizen and resident of South Korea, says the Securities and Exchange Commission's move violated the agency's rules and was designed to embarrass him or to spark media interest in his crackdown on the cryptocurrency market. .
Mr. Kwon and his company have sued the SEC over the episode and want a federal judge to vacate the subpoenas. The subpoenas were personally served on Mr. Kwon when he stepped off an escalator at a New York hotel where he was scheduled to speak at a crypto conference, according to his lawsuit.
The incident caused a stir at the Mainnet 2021 event and provided fuel for articles on numerous crypto-media websites. Issuing the subpoena in person violated the SEC's own rules for keeping its investigations secret, Mr. Kwon's lawsuit alleges.
An SEC spokeswoman declined to comment. A lawyer for Kwon did not immediately return messages seeking comment.
The SEC under President Gary Gensler
has taken a strict stance on the cryptocurrency market, which mostly exists outside of federal regulation. Gensler has questioned whether many coin issuers and exchanges are breaking investor protection rules.
SEC attorneys first emailed Mr. Kwon about their investigation in May, seeking his voluntary cooperation, according to the complaint. Regulators interviewed him by video in July and, in September, told his lawyers that they believed an enforcement action was warranted, the complaint says.
But taking formal action was complicated because the US agency lacks clear jurisdiction over Kwon and his Singapore-based company, Terraform Labs Pte Ltd., according to the lawsuit. Serving the subpoenas to Mr. Kwon in person was "intended to impermissibly secure personal jurisdiction over Mr. Kwon" and Terraform, the document says.
A bitcoin mining facility in upstate New York is using electricity from a local hydroelectric plant powered by the Niagara River. The company is part of a group of miners trying to make the industry more sustainable, both environmentally and financially. Illustration: Alex Kuzoian / WSJ
Serving Kwon while he was in the US could also make it easier for the SEC to obtain evidence from him without having to work through foreign regulators, said Ashley Ebersole, a partner at Bryan Cave Leighton Paisner LLP who previously worked at the SEC.
"The [conference] the context is unusual, but I wouldn't necessarily read anything in this beyond a certain time and date and knowing that the person is going to be there, "he said.
Terraform creates software programs designed to facilitate the use and creation of cryptocurrencies and other digital assets.
The SEC has been investigating a particular application that Terraform developed, known as the Mirror protocol, according to Mr. Kwon's complaint. Mirror enables traders to create new digital assets that track the prices of stocks and exchange-traded funds.
Regulators have warned in the past that such assets look like derivatives, which in the US generally must be traded on regulated markets overseen by agencies like the SEC. Platforms that sell crypto derivatives generally attempt to follow US law by prohibiting US traders from accessing their programs.
Mr. Kwon's lawsuit does not explain the theory of the SEC's investigation or what laws Terraform may have violated. He requests that a judge reject the subpoenas and order the SEC to pay Terraform's attorney fees associated with the lawsuit.
News of the subpoenas spread quickly on social media websites last month, after Slava Rubin, an investor attending the conference, wrote on Twitter: "Lol, I just witnessed a guy being treated by the SEC at the top of the escalator at # mainnet2021 just before he went on stage for his panel."
The tweet sparked outrage from the conference organizer, who complained that regulators invaded the event to deliver a subpoena to a participant. When another
the user congratulated Mr. Rubin for reporting the incident, answered: "Thank you. Just on the right escalator at the right time."
Write to Dave Michaels in dave.michaels@wsj.com
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